Is more finance better? Disentangling intermediation and size effects of financial systems

Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of financial system – a focus on its size, including both intermediation and other auxiliary “non-intermediation” activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980–2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries. As this is an initial exploration of the link between financial system indicators and growth and volatility, we focus on OLS regressions, leaving issues of endogeneity and omitted variable biases for future research

Tracking foreign capital: the effect of capital inflows on bank lending in the UK

This paper examines how UK banks channel capital inflows to the individual sectors of the domestic economy and to overseas residents. Information on the source country of foreign capital deposited with UK banks allows us to construct a novel Bartik instrument for capital inflows. Our results suggest that foreign funds boost bank lending to the domestic economy. This result is due to the positive effect of capital inflows on bank lending to non-financial firms and to other domestic financial institutions. Banks do not channel capital inflows directly to households or the public sector. Much of the foreign capital is also channeled back abroad, reflecting the role of the UK as a global financial center

Is more finance better? Disentangling intermediation and size effects of financial systems

Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of finance – the size of the financial sector, including both intermediation and other auxiliary “non-intermediation” activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and the degree of intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980-2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries.status: publishe

The real effects of capital requirements and monetary policy: evidence from the United Kingdom

We examine how changes in capital requirements and monetary policy shocks affect corporate investment during a credit boom. Our empirical analysis uses data on SMEs in the UK between 1998 and 2006, a period when monetary policy and microprudential regulation were set by independent institutions. We find that an increase in bank-specific capital requirements led to a contraction in corporate debt and investment, but only for firms with short bank relationships. This suggests that relationships between firms and banks are crucial for the transmission of regulatory shocks. Long relationships also attenuate the impact of monetary policy shocks, but to a smaller degree than for capital requirement changes. We also find that the two policies do not dampen or amplify the effect of each other, but their effects vary with the size of banks’ capital buffers and the creditworthiness of firms